Opinion: Workers are behind inflation with every paycheck, but that won’t reassure a Fed determined to stifle inflation


The Federal Reserve doesn’t like Friday’s jobs report, which showed an additional 528,000 jobs were created in July while the jobless rate fell to 3.5%, the lowest rate since over 50 years old.

They should like the strong market. After all, one of the official duties of the Fed is to promote “maximum employment” and this report shows that we are close to that goal. Yay!!

Recent news: Shocking jobs: US unemployment drops to pre-pandemic levels as economy adds 528,000 jobs in July

Too much of a good thing

Here’s the catch: more jobs are a good thing, but too much of a good thing can cause problems. Problems such as higher inflation rates. Boo!!

The Fed’s other mandate is price stability, and from that perspective July’s jobs report was troubling because it showed the labor market could get so good it would cause inflation. .

The Fed is taking no risk with the development of a wage-price spiral. He’s going to break the cycle by making sure wages don’t get too high. And if that means slowing the economy so much that companies will lay off workers instead of giving them money to stay, so be it.

That’s why the Fed didn’t like that strong jobs report and that’s why financial markets expect the Fed to get more aggressive in raising its benchmark interest rate to FF00,
to lower inflation. The stronger the job market, the harder the Fed has to fight.


Here’s why: the Fed is concerned that labor markets are so tight and labor is so scarce that companies will be forced to raise wages to attract and retain the employees they need (this often happens ), and be forced to raise their selling prices so they can afford to pay their workers more (this doesn’t happen much).

Lily: People who changed jobs saw their wages increase more than people who decided to stay put. Here’s what’s at stake.

If this happened in many companies, a dreaded wage-price inflationary spiral would ensue, with higher wages leading to higher prices throughout the economy, which in turn would lead workers to demand even higher wages. high to keep up with inflation, which would force companies to raise prices again. And so on, in an infernal spiral of endless inflation.

No wage-price spiral yet

Has the spiral gotten out of control? Not so far. There is little evidence that higher wages lead to higher prices to any great extent. Earnings for most workers do not keep up with inflation.

Even after paying higher wages and higher prices for inputs, companies report that their profit margins are still quite high, meaning they pocket the windfall they get by charging higher prices instead. to be forced to hand it over to their workers.

The Fed is being ultra cautious right now. It was burned in 2021 when it ignored accelerating inflation thinking it was temporary. So now the Fed is taking no chances with the development of a wage-price spiral. He’s going to break the cycle by making sure wages don’t get too high. And if that means slowing the economy so much that companies will lay off workers instead of giving them money to stay, so be it.

What’s the latest evidence on salaries? Over the past three months, average wages have increased at an annual rate of 5.3%, while the average wages of production workers have increased at an annual rate of 5.9%, the Bureau of Labor Statistics.

Wages are growing a bit faster than they were in the spring, but slower than they were for most of 2021. Depending on what period you compare them to, you could say wages are accelerating slightly or slow down a little. That’s the same message the Fed got from the second-quarter employment cost index, which showed compensation costs rising at an annual rate of 5%.

(A quick aside: the quarterly CIS has an advantage over the average wage data that appears in the monthly employment report: it is adjusted for changes in the composition of workers, which means that ‘he wasn’t fooled by assuming wages rose 20% – most in the spring of 2020, when 22 million low-income workers lost their jobs – and everyone else kept theirs – when the pandemic took hold crippled the economy.)

Given the evidence that wages are growing at a rate of 5-6%, there is no reason for Fed policymakers to believe they have done enough to depress the rate of wage growth ( or prices).

On the other hand, there is no reason for the Fed to think that higher wages have become the ultimate cause of our inflation problem. Global supply and demand explain inflation quite well.

We don’t have any inflation data for July yet, but over the April-June period, the consumer price index rose at an annual rate of 11%, about twice as fast as wages. Early expectations are that the CPI moderated in July, but we don’t yet know by how much.

Friday’s jobs report showed wages continue to rise much more slowly than inflation; workers are still falling behind with every paycheck. This fact should be at least somewhat reassuring to the Fed, but right now the Fed is in no mood for reassurance from anything other than solid evidence that inflation has been broken.

After: There was a red flag in a shockingly strong US employment report. Where was there?

Rex Nutting is a columnist for MarketWatch and has written about economics for over 25 years.

Hear Ray Dalio at the Best New Ideas in Money Festival on September 21-22 in New York City. The hedge fund pioneer has a strong opinion on the direction the economy is taking.


Comments are closed.